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NCUA Chairman Todd M. Harper Statement on the Normal Operating Level Briefing

December 2022
NCUA Chairman Todd M. Harper Statement on the Normal Operating Level Briefing
Todd M. Harper

NCUA Chairman Todd M. Harper during a meeting of the NCUA Board in 2022.

As Prepared for Delivery on December 15, 2022

Thank you, Andy, David, and Amanda, for your briefing on the normal operating level. Your observations underscore the importance of maintaining a strong National Credit Union Share Insurance Fund.

Thank you, as well, for developing the additional analysis that explains in more detail your recommendation for the normal operating level. In the 2022 Annual Performance Plan, the NCUA Board committed to providing stakeholders with more information about the factors used in setting the Share Insurance Fund’s normal operating level. Your analysis meets that performance goal and provides a high level of detail and explanatory data. Thank you for this additional transparency.

With $20.2 billion in assets, the Share Insurance Fund currently shields the four in ten Americans who use a federally insured credit union. The Share Insurance Fund guarantees more than just their accounts or balances on a spreadsheet. It protects the financial well-being and dreams of families, businesses, and communities who have entrusted their hard-earned savings in federally insured credit unions.

The Share Insurance Fund is also a critical bulwark which helps to maintain the economic and financial stability of our nation. Last year, the NCUA Board prudently approved setting the Share Insurance Fund’s normal operating level at 1.33 percent for 2022. That sound decision has provided the Share Insurance Fund with a cushion of additional reserves to safeguard the system as we navigated through many challenges in the last year.

For example, there were supply chain distributions and labor shortages related to the pandemic. Additionally, Russia’s unjust war in Ukraine disrupted global food supplies and energy markets. We also saw inflation rise to the highest levels in decades. And, consumer confidence weakened as households took on more debt. Nevertheless, the unemployment rate remained low and wage growth stayed strong.

In terms of overall performance, federally insured credit unions remained on a solid footing during 2022. Total loans, assets, and insured shares and deposits all increased. Yet, some cracks have started to form around the system’s edges and within some credit unions. In the year ahead, we need to ensure that these small fissures do not grow into sizable fault lines.

In last month’s Share Insurance Fund report, we learned of an increase in the number of credit unions with a composite CAMELS code rating of 3, 4, or 5 in the third quarter. Several credit unions have also recently experienced liquidity issues, including some with more than a billion dollars in assets. And, with ongoing inflationary pressures and continued interest rate increases likely, the potential for headwinds slowing the economy and increasing stress on both households and financial institutions alike grows.

One of the most important responsibilities of the NCUA Board is maintaining the health and stability of the Share Insurance Fund. Indeed, the Board’s policy calls for setting the normal operating level at a level sufficient to:

  • retain public confidence in federal share insurance,
  • prevent the impairment of the one-percent contributed capital deposit, and
  • ensure the Share Insurance Fund can withstand a moderate recession without the equity ratio declining below 1.20 percent over a five-year period.

Given the level of economic uncertainty in the year ahead and the growing stresses we see within the credit union system, the staff’s recommendation to maintain the normal operating level at 1.33 percent in 2023 is sound. As detailed on slide 15, we could have opted to round the normal operating level up to 1.34 percent based the December 2022 estimate of 1.339 percent.

But, because this figure was just a half of basis point different from the actual normal operating level for December 2021, we decided to maintain the current level. I am supportive of this recommendation because the Board will continue to monitor the potential risks to the Share Insurance Fund and can reevaluate the normal operating level as emerging trends in the industry, the economy, and interest rate forecasts become clearer.

Before closing, I do have a few questions. My first question is for Andy.

Andy, one of the consistent long-term trends affecting the Share Insurance Fund has been the slow and steady decline of the equity ratio due to the ongoing growth in insured shares. Do you expect that trend to continue in the years ahead? Also, how did insured shares growth factor into your analysis?

Thank you for that explanation, Andy.

My next question relates to the economy. As we approach the new year, what is your sense of the economic outlook and interest rate forecast for 2023? How will those two factors affect credit union performance, and what will that mean for the Share Insurance Fund?

Thank you, Andy. Your comments illustrate the importance of credit unions staying focused on managing their interest rate, liquidity, and credit risks, among other things.

My final question concerns the number of credit unions with a composite CAMELS code 3, 4, or 5 rating. David or Amanda, should we anticipate that number to rise over the next year?

Thank you, David. Your answer reiterates the wisdom of keeping the normal operating level where it is. It also illustrates that the NCUA Board must continue monitoring the risk exposures for the Share Insurance Fund and the credit union industry. And, your answer helps to explain why we need to modestly increase the agency’s budget in the year ahead, which the Board will consider later today.

Thank you again, Andy, David, and Amanda, for your good work. That concludes my comments. I now recognize Vice Chairman Hauptman.

Todd M. Harper Share Insurance Fund
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